The signaling effect of supplier's customer network instability on service price: Insights from the container shipping charter market

Abstract

AbstractIn a service exchange setting, the supply management literature generally assumes, with notable exceptions, the availability of complete information regarding supplier reliability. Highlighting the information asymmetry in supplier evaluation and using signaling theory, we argue that for a focal buyer, a supplier's downstream ego‐network instability, that is, other buyers' turnover in a supplier's network from one period to the next, acts as a signal of supplier unreliability, thereby reducing the price that the buyer pays to the supplier in a service exchange. Furthermore, we suggest that focal buyer–supplier relationship strength and structural equivalence weaken the negative effect of instability because the buyer has a more direct and positive experience with the supplier. Using a dataset of 3263 unique dyads formed by 260 buyers (shipoperators) and 493 suppliers (shipowners) during the 2000–2018 period in the container shipping charter market, we find support for our hypotheses, except for the contingent effect of structural equivalence. Our study contributes to signaling literature and network research by developing a supplier's downstream ego‐network instability as a salient heuristic for a focal buyer's pricing decisions. These findings equip buyer managers who may not accurately foresee supplier service quality in the charter market with a new supplier evaluation tool: a supplier's downstream ego‐network instability.